A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.

The healthcare industry has been undergoing a massive state of transition recently, especially since the American Recovery and Reinvestment Act of 2009 (ARRA) was signed into law in 2009, and the Affordable Care Act (ACA) (Obamacare) was signed into law in 2010.

The ARRA required healthcare providers to adopt electronic medical records in order to continue to receive current levels of Federal reimbursements. More specifically, “Federal Mandates for Healthcare: Digital Record-Keeping Will Be Required of Public and Private Healthcare Providers” states:

As of January 1, 2014, all public and private healthcare providers and other eligible professionals (EP) must have adopted and demonstrated “meaningful use” of electronic medical records (EMR) in order to maintain their existing Medicaid and Medicare reimbursement levels.

The adoption of EMRs created the big push necessary to compel many participants in the healthcare system to finally digitize their records and activities. The onslaught of digital healthcare information that is now becoming available is inducing massive changes in the way healthcare providers operate. In particular, payers (insurance companies, Medicare, and Medicaid) are now using “pay-for-performance” (P4P) systems. Under these new payment systems, a portion of the reimbursements that providers earn for healthcare services they provide patients have become contingent upon the providers achieving “good patient outcomes”. Part of the intent of P4P systems has been to encourage more “patient-centered care”, in which patients and providers increase their levels of collaboration, in an effort to increase the quality of healthcare services and outcomes for patients.

The ARRA also increased funds available for wellness programs. These programs provide encouragement and support for people to achieve and/or maintain healthy lifestyles.

The ACA has had several impacts on the healthcare system, including (i) increasing patients’ access to healthcare services, (ii) increasing the amount of cross-subsidization of higher users of healthcare services by lower users of healthcare services, (iii) increasing the amount of cross-subsidization of poorer users of healthcare services by wealthier users of healthcare services and (iv) introducing “pay-for-performance” systems into compensation systems for healthcare providers. More generally, according to Wikipedia,

The ACA was enacted to increase the quality and affordability of health insurance, lower the uninsured rate by expanding public and private insurance coverage, and reduce the costs of healthcare for individuals and the government. It introduced mechanisms like mandates, subsidies, and insurance exchanges. The law requires insurance companies to cover all applicants within new minimum standards and offer the same rates regardless of pre-existing conditions or sex. Additional reforms were increased competition, regulation, and incentives to streamline the delivery of healthcare.

The ongoing evolution of the healthcare industry, combined with the newly created rules and incentives engendered by the ARRA and the ACA, have created numerous tensions between doctors, patients, and payers. This analysis examines those tensions and attempts to assess how the different players will ultimately react.

Doctors

Historically, physicians practicing in the US have had a strong desire for independence and autonomy. This is reflected by the preponderance of physicians working in smaller private practices, as opposed to working in larger groups or hospital settings. As from Suzanne M. Kirchhoff, “Physician Practices: Background, Organization, and Market Consolidation” notes,

Most Americans enter the health care system through their local physician’s office, which is the setting for 84% of primary care visits. Historically, physicians have operated in what the American Medical Association and others have called a “cottage industry” of small or solo practices around the country. Even now, the majority of the approximately 972,376 doctors and residents in the United States work mainly from smaller, office-based practices.

As Figure 1 (taken from “Clinical Integration – The Key to Real Reform”) illustrates, about half of physicians practice in offices with just one or two physicians.

Figure 1

However, more recently, there are several forces in the healthcare system that have been pushing physicians to consolidate from smaller private practices into larger, diversified practices and hospital affiliations. Such forces include: (i) decreases in reimbursements, (ii) divergences in reimbursement rates across locations, (iii) increases in costs, and (iv) increases in regulations.

Decreasing Reimbursements

Payers’ reimbursements for the provision of physicians’ services have been decreasing in real terms over the past twenty-five years. In particular, as Medicare has faced massive increases in healthcare spending over the years, it has cut its reimbursements to physicians in an attempt to help stem costs. Furthermore, these cuts in reimbursements from Medicare flow through the industry and induce cuts in private insurance reimbursements for physicians’ services. John C. Nordt, MD; Michael P. Connair, MD; Jamie A. Gregorian, Esq., in “As Medicare Costs Rise, Reimbursements Drop,” describe these trends in more detail.

In 1990, Medicare expenditures totaled $111 billion. That number has more than quintupled today [2012]. But even as Medicare costs have skyrocketed, the individual payments to physicians for services rendered have plummeted—particularly for surgical procedures.

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Moreover, the declining rate of Medicare reimbursement has a direct impact on reimbursements from private insurers. Like it or not, many commercial insurers base their reimbursement schedules on a percentage of Medicare reimbursement, although no rational market basis for them to do so or for physicians to accept such an irrational discount for their services exists.

The sheer market power of a handful of commercial insurers enables them to impose copy-cat Medicare discounts. Those commercial insurers know that physicians cannot collectively resist the discounts under current federal antitrust enforcement policies.

Figure 2 presents a graph of reimbursements for select orthopedic procedures over the 1992 through 2010 period, taken from the article by Nordt et al. The figure illustrates that while the CPI has increased by almost 60% over the period, reimbursements for the indicated procedures have decreased by 40%. By 2010, there was an enormous gap by between physicians’ costs (as proxied by the CPI) and their associated reimbursements for providing services.

Figure 2

Divergent Reimbursement Rates by Location

Another trend that’s been encouraging physicians to changing their status from being independent to being hospital-affiliated is the increasing divergence in reimbursements by provider affiliation. More specifically, reimbursements for the same exact procedure are greater when performed by physicians affiliated with hospitals than by independent physicians. In “When Hospitals Buy Doctors’ Offices, and Patient Fees Soar,” Margot Sanger-Katz explains this phenomenon in greater detail.

Medicare, the government health insurance program for those 65 and over or the disabled, pays one price to independent doctors and another to doctors who work for large health systems — even if they are performing the exact same service in the exact same place.

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The heart doctors are a great example. In 2009, the federal government cut back on what it paid to cardiologists in private practice who offered certain tests to their patients…

But the government didn’t cut what it paid cardiologists who worked for a hospital and provided the same test. It actually paid those doctors more, because the payment systems were completely separate. In general, Medicare assumes that hospital care is by definition more expensive to provide than office-based care.

You can imagine the result: Over the past five years, the number of cardiologists in private practice has plummeted as more and more doctors sold their practices to nearby hospitals that weren’t subject to the new cuts. Between 2007 and 2012, the number of cardiologists working for hospitals more than tripled, according to a survey from the American College of Cardiology, while the percentage working in private practice fell to 36 percent from 59 percent. At the time of the survey, an additional 31 percent of practices were either in the midst of merger talks or considering it…

In the last few years, there have been increases in the number of doctors working for hospitals across the specialties.

Transition to Pay-for-Performance

Under the ARRA/ACA, Payers (insurance companies, Medicare, Medicaid) are changing the way they reimburse physicians. Specifically, payers are transitioning from a fee-for-service system to a pay-for-performance system. Under the traditional fee-for-service system, physicians are reimbursed for each treatment they provide patients. Under the new pay-for-performance system, a portion of physicians’ reimbursements is now dependent upon the quality of care they provide patients.

Quality of care is enhanced by

•  Greater access to information (achieved through investments in IT, EMR and other resources),

•  Greater coordination across providers (achieved though a combination of such factors as investments in IT and EMR, greater communication, and co-location of practices),

•  More regulations (licensing and certification, enhanced breadth of services required, required use of best practices, etc.)

•  Better communication with patients

All of these inputs into enhancing quality of care require physicians to make greater time and money investments in the services they provide.

In addition to increasing physicians’ time and money costs, the transition from a fee-for-service system to a pay-for-performance system also ends up shifting much of the risks associated with the costs of caring for patients from the insurance companies onto the physicians.

Increasing Costs

While reimbursements for physicians’ services have been declining, the costs to physicians of practicing medicine have increased. In 1975 the Centers for Medicare and Medicaid Services (CMS) developed a measure of practice cost inflation called the Medicare Economic Index, (MEI). According to Wikipedia,

The MEI was designed to measure changes in costs of physician's time and operating expenses, adjusted for changes in physician productivity.

According to the CMS (see Figure 3), from 2001 through 2019, physicians’ costs are expected to increase by 38%, while Medicare reimbursements are expected to decrease by 26%. (Note that the measures in Figure 2 are consistent with those in Figure 1).

Figure 3

Increasing Regulations

From PriceWaterhouseCoopers, “Patients or Paperwork? The Regulatory Burden Facing America’s Hospitals” (emphasis in original):

The people who take care of people know first-hand that many of today’s health care regulations are too complex and inefficient, yet new ones are imposed on the system everyday. Health care workers strive to keep up with these regulatory requirements but are frustrated when their time and energy is diverted from their primary purpose—providing quality healthcare to patients—to trying to decipher and comply with the bureaucratic controls that often seem detached from good care and efficient use of resources.

But how much time does a physician spend on paperwork and regulatory compliance, beyond writing diagnoses, medical orders and prescriptions?

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The results? For the various stages of care of a typical patient, paperwork adds at least 30 minutes to every hour of patient care provided and, in some settings, adds an hour of paperwork to every hour of patient care [see Figure 4].

Figure 4

What it comes down to is that all the new regulations and compliance measures associated with the ARRA and the ACA will further increase the already tremendous burden on physicians.

The higher costs and greater regulations associated with practicing medicine, coupled with decreasing reimbursements, have been leading physicians to consolidate. Economies of scale help reduce the per-physician costs associated with performing insurance, regulations, and compliance requirements.

At the same time, larger practices and affiliations have more leverage in dealing with insurance payers and are thus able to negotiate higher reimbursement rates.

Go to Playing the Doctor-Patient-Insurance Company Game, Part 2